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We study the joint dynamics of macroeconomic variables, bond yields, and the exchange rate in an empirical two-country New-Keynesian model complemented,with a no-arbitrage term structure model. With Canadian and US data, we are able to study the impact of macroeconomic,shocks from both countries on their yield curves and the exchange,rate. The variance,decomposition,of the yield level shows,that the US monetary,policy and aggregate supply shocks explain a majority of the unconditional,variations in Canadian yields. They also explain up to 50% of the variations in the expected,excess olding period returns of Canadian bonds. In addition, the Canadian monetary policy shock explain more,than 70% of the variations in Canadian,yields over short and medium forecast horizons. It also explains around,40% of the expected,excess olding period returns of Canadian bonds. Both Canadian and US macroeconomic,shocks help explain the dynamics,of the exchange,rate and the time-varying exchange,risk premium. 1I ntroduction

A No-Arbitrage Analysis of Macroeconomic Determinants of Term Structures and the Exchange Rate